Province’s trade mission to China and Japan aimed at reducing reliance on U.S. market

Exports of B.C. lumber to the U.S. totalled $4.4 billion in 2016, compared with about $1 billion in exports to China.

Not even in Tokyo in the middle of the “largest ever” forestry-focused Asian trade mission could B.C. Forests Minister Doug Donaldson and industry leaders avoid talking about U.S. softwood lumber duties.

Last week, during a mid-mission teleconference from Japan, Donaldson spoke of the importance of increasing B.C. lumber exports to China and Japan.

But it was softwood lumber duties and the North American Free Trade Agreement (NAFTA) that dominated the discussion with reporters.

The point of the mission was to expand markets in Asia for B.C. wood products to reduce the province’s reliance on the U.S. – which imports four times the volume of B.C. lumber that China does.

Donaldson was leading a trade mission with 30 forest company executives to meet government and business leaders in Shanghai, Nanjing and Tokyo. China is B.C.’s second-biggest market for lumber; Japan is the third-largest.

During the mission, Canada Wood China signed a memorandum of understanding with Yadong Construction and Development Group for the promotion of manufactured wood products like cross-laminated timber.

Such agreements are the necessary first step in developing capacity and cultivating a wood culture, because many builders in China are not accustomed to using wood products for construction.

“We have to work with developers and builders and help them understand construction techniques,” said Rick Jeffery, president of the Coast Forest Products Association.

He added that one of the biggest markets for some B.C. wood products, such as cedar, is not in construction but in furniture manufacturing.

A decade ago, China helped keep B.C.’s forest industry afloat during the housing and financial crisis in the U.S. While the U.S. home construction industry crashed, China’s rapid growth created an overnight demand for lower-grade lumber, mostly for framing.

In 2010, China overtook Japan as B.C.’s second-largest lumber market. In 2007, B.C. exported only $92 million worth of lumber to China, whereas Japan imported between $1 billion and $2 billion worth of lumber from B.C. annually from 1989 to 2006. Exports to Japan have steadily declined since then, falling to about $730 million in 2016.

By contrast, B.C. lumber exports to China hit $1.4 billion in 2013 and 2014, but dropped to $1 billion in 2016. That decline was in part due to the falling value of the Russian ruble, which allowed Russia to increase lumber sales to China, Jeffery said.

“We’ve started to right that ship,” Jeffery added. “In the last couple of years the trend has been for B.C. shipments to increase into China. We see the trend continuing for increased shipments both in value and volume into China.”

But expanding that market will take time. In the meantime, despite new anti-dumping and countervailing duties totalling about 20% on B.C. lumber, sales to the U.S. remain strong, driven by new housing starts.

While B.C.’s larger forestry companies are expected to be able to absorb the duties and pass them on to U.S. customers, smaller companies are already feeling the strain.

Earlier this year, for example, Western Forest Products Inc. (TSX:WEF) shut down its Somass sawmill in Port Alberni, citing a log shortage and uncertainty over softwood lumber duties for the closure.

After failing to negotiate a new softwood lumber agreement that would end the duties, Ottawa last week resorted to litigation, and filed an application to have a bi-national panel review U.S. duties on Canadian softwood lumber, under Chapter 19 of NAFTA.

Chapter 19, a dispute resolution mechanism, is one item in NAFTA that U.S. negotiators want removed, which raises the concern that using it to try to get a resolution to the softwood lumber agreement will firm up American resolve to get rid of it.